Bulls Rewarded With Best January Rally Since 2006

Speculators increased their bullish commodity wagers for a third straight week before prices capped the biggest January rally since 2006 on signs that the global recovery will be sustained by central bank stimulus.

Hedge funds and other money managers raised net-long positions across 18 U.S. futures and options in the week ended Jan. 29 by 5.6 percent to 800,738 contracts, the highest since Dec. 11, U.S. Commodity Futures Trading Commission data show. Traders became the most bullish on cotton since October 2010 and increased wagers on silver gains. Crude-oil holdings rose a seventh week, the longest stretch, data starting in 2006 show.

The Standard & Poor’s GSCI Spot Index of 24 commodities advanced 4.5 percent in January as contracts outstanding jumped 6.2 percent, the most in a year. Chinese manufacturing expanded for a fourth month, and U.S. payrolls climbed, separate reports showed Feb. 1. The Federal Reserve will keep buying securities at the rate of $85 billion a month to help sustain the rebound, policy makers said Jan. 30, while speculation grew that a new Japanese central bank governor will boost stimulus.

"We’ve seen some better-than-expected indicators out of China lately, and in general the global economy seems to be a bit better than people had been forecasting coming into 2013," Peter Jankovskis, who helps manage about $3.2 billion at Oakbrook Investments in Lisle, Illinois, said in a telephone interview. "The Fed continues to be very supportive of the economy, and that’s good for commodities."

Longest Rally

The GSCI Spot Index rose 2.5 percent last week, an eighth consecutive gain and the longest rally since 1996. The MSCI All- Country World Index of equities climbed 0.7 percent, while the dollar slid 0.8 percent against a basket of six trading partners. Treasuries lost 0.1 percent, a Bank of America Corp. index shows.

A Chinese Purchasing Managers’ Index was 50.4 in January, the National Bureau of Statistics and China Federation of Logistics and Purchasing said. Readings above 50 indicate expansion. Earnings at Chinese industrial companies increased for a fourth straight month in December, the bureau said Jan. 27.

The U.S. added 157,000 jobs in January and there were more hirings in the previous two months than reported earlier, government figures showed. The jobless rate increased to 7.9 percent from 7.8 percent.

Stimulus Action

While the report showed the labor market "continues to heal," the gain in unemployment means the Fed will "remain engaged" in stimulus action, Mohamed El-Erian, the chief executive officer of Pacific Investment Management Co., said in a Bloomberg Television interview Feb. 1. Speculation that Japanese Prime Minister Shinzo Abe will pick a new central bank governor who will boost stimulus drove the yen to the lowest in 2 1/2 years.

Global demand for commodities won’t expand fast enough to catch up with rising supplies as four years of price gains have spurred farmers and miners to increase production, said John Stephenson, who helps manage about C$2.7 billion ($2.7 billion) at First Asset Investment Management Inc. in Toronto.

The U.S. economy unexpectedly came to a standstill in the fourth quarter as gross domestic product dropped at a 0.1 percent annual rate, weaker than any analyst estimate in a Bloomberg survey, the Commerce Department said Jan. 30. Japan’s industrial production rose less than economists forecast, Trade Ministry data showed the next day.

Commodity Surpluses

Output will top consumption of aluminum, copper, lead, nickel and zinc this year, Barclays Plc forecast in a report on Jan. 16. Supplies of sugar, coffee and cotton will also exceed demand in 2013, Macquarie Group Ltd. said in a report the following day.

"China is the only good news in the commodity story, and that won’t be enough to lift the whole complex," Stephenson said. "For any materials where they can ratchet up supply to meet demand, that’s a commodity you don’t want to be in."

Money managers withdrew $68 million from commodity funds in the week ended Jan. 30, according to Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Gold and precious-metal funds had a net outflow of $379 million.

Bets on a crude-oil rally climbed 6.2 percent to 218,604 contracts, the highest since May 1, the CFTC data show. Futures in New York advanced 2 percent last week, the eighth consecutive gain and the longest rally since August 2004. Heating-oil wagers rose 15 percent to 33,427 contracts, the highest since Oct. 16.

Gold Holdings

China, the largest oil-consuming country after the U.S., accounted for 11 percent of global demand in 2011, according to BP Plc. The Asian nation, with a population of 1.34 billion, uses about 40 percent of the world’s copper, Barclays estimates.

Investors cut gold holdings 24 percent to 82,081 contracts, the lowest since Aug. 14. Prices fell 0.8 percent in January, a fourth straight drop, as signs that the global economic recovery is gaining traction reduced demand for the metal as a haven. Bullion for delivery in April rose 0.3 percent to $1,676.40 an ounce on the Comex today.

The gold position at Elliott Management Corp., the $21 billion hedge fund founded by Paul Singer, lost money last quarter after nine months of "essentially flat performance," the New York-based firm said in a report to investors on Jan. 28. It’s increasingly likely that prices peaked in 2011 and "downside risks" are building as world expansion improves, Tom Kendall, an analyst at Credit Suisse AG in London, said in a report e-mailed Feb. 1.

Corn positions climbed 8.5 percent to 164,434 contracts, and those for soybeans 7.4 percent to 105,017 contracts, the highest in five weeks.

Dry weather is curbing the outlook for soybean supplies in Argentina after the worst U.S. drought since the 1930s cut production last year. The South American country’s oilseed production may trail a U.S. government forecast by as much as 13 percent, according to Deutsche Bank Securities Inc.

The funds boosted their bullish cotton bets by 28 percent to 53,295 contracts, the highest since Oct. 26, 2010. Futures in New York climbed 10 percent in January, the biggest gain among the commodities tracked by S&P, on mounting signs that a global surplus is shrinking as Asian demand grows and farmers reduce output in the U.S., the world’s largest exporter.

"The forecast for improving growth and easy money argues that commodities should do quite well," said Kevin Caron, a Florham Park, New Jersey-based market strategist at Stifel Nicolaus & Co., which oversees about $130 billion in assets. "Demand is increasing. China seems to be turning the corner, and manufacturing is moving in the right direction."